Rental Income. You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of your property.

Report rental income on your tax return for the year you actually or constructively receive it, if you are a cash basis taxpayer. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned.  You constructively receive income when it is made available to you, for example, by being credited to your bank account.

One area that trips up landlords is advance rent.  Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered.

Travel Expenses.  You may deduct car expenses when you drive for any rental activity. For example, if you met with your property manager or a repair person at your rental property you could deduct your vehicle expenses.

When deducting vehicle expenses, the IRS gives you two options: (1) you can deduct your actual expenses (gas, maintenance, etc.) or you can use the standard mileage rate (55 cents per mile in 2009). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. In addition, you are not allowed to use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years (ask your accountant if you are unsure).

If you travel overnight for your rental activity, you can deduct your expenses.  This would generally include airfare, hotel expenses, meals, rental car, etc. In case of an audit, make sure you properly document all of your travel expenses.

Additional Deductions.  Make sure that you consider all deductions that you are entitled to.  The following are common deductions that are often missed by landlords:

1)   Meals and Entertainment

2)   Educational Expenses

3)   Dues and Subscriptions

4)   Insurance

5)   Legal and Professional Fees

6)   Gifts

7)   State and Local Income Taxes

Cost Segregation.  Rental property owners can significantly increase their tax deductions by using an asset depreciation approach called “cost segregation.”  Cost segregation is the practice of identifying assets and their respective cost basis, and classifying those assets for federal tax purposes. 

Residential real estate has a useful life (for tax purposes) of 27.5 years.  However, cost segregation will enable a property owner to allocate certain costs associated with the building and improvements to tangible personal property and land improvements, which have shorter lives.

Under this approach, certain amounts that would have been previously depreciated using a 27.5 year life may now be depreciated using 5, 7 or 15 year lives under accelerated methods.  The result is greater depreciation write-offs and increased cash flows in earlier years.  Accordingly, cost segregation allows investors to depreciate new or existing properties in the shortest amount of time permissible under current tax law.  Taxpayers can use cost segregation upon construction of a building or acquiring an existing one. 

Being a successful landlord takes a lot of diligence and hard work.  But fortunately it can be done, and has been done by many.  Success rarely happens by accident and it rarely happens overnight. Those who are able to achieve their financial goals develop a plan and execute on that plan.  To be successful you definitely need to work hard and do your homework.  But more important than working hard is working smart.

Paul B. Sundin is an Arizona CPA.  He works with real estate investors as well as business owners.  Please see his website at www.sundincpa.com.  You can also contact him at 480-626-8043 or email him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  This article is written for informational purposes only and is not meant to be tax advice.  Each situation is different so please review your situation with a CPA or other tax professional.  To ensure compliance with the requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.